GBP to EUR Conversion's Uptrend Intact as 24-Year Manufacturing PMI Record Sets the Pace
The month of November got off to the best possible start for the British pound as the UK manufacturing sector put recent weakness behind it.
The pound to euro exchange rate (GBPEUR) bounced higher on the first day of trade in November - the driver being the Manufacturing PMI release that came in well ahead of expectations.
The Markit / CIPS data read at 55.5, well ahead of forecasts for a reading of 51.3, confirming UK manufacturing is in robust health.
The manufacturing PMI posted one of its sharpest increases in its entire 24 year history today, surging to 55.5 against our expectation for a much more muted gain and markets looking for a decline on the month.
Expansion was broad-based across both output and new business, in particular for large companies.
Export orders from the Middle East, East Asia, and the US helped drive an important gain in the export orders number, and employment expanded for the 30th consecutive month.
Comparative figures for September showed the sector had slowed down and many pundits were quick to write the obituary for UK manufacturing, particularly with the closure of UK steel plants dominating the headlines. They were wrong it seems.
Of course such robust figures add to the case for the Bank of England to raise interest rates. This theme is the key driver for a stronger British pound over recent days, and should expectations for an early-2016 interest rate rise solidify then expect the pound to euro exchange rate to tread even higher.
Latest Pound/Euro Exchange Rates
  | Live: 1.146▲ + 0.15%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.107 - 1.1116 |
**Independent Specialist | 1.13 - 1.1345 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Pound to Euro Back Below 1.40, but Remains in Uptrend
The GBPEUR exchange rate has since fallen back below the magic 1.40 threshold as markets take money off the table ahead of the Bank of England's Thursday meeting and Inflation Report.
This is an understandable reaction as markets know this is the real driver of GBP in the near- to medium-term.
Technically speaking, sterling is now back in an uptrend against the euro with the key 1.40 level being broken at the close of October.
This move higher has inevitably lead us to turn our eyes towards the magical 1.44 mark – this represents the best exchange rate of 2015.
There is one point of concern for us though, and that is the Relative Strength Index on the daily GBPEUR chart which now reads at 70. A reading of 70 and above signifies an overbought trend.
The assumption is that these overbought conditions cannot last for long periods of time and must fall back towards equilibrium at 50.
We would not be surprised should the exchange rate therefore enter a period of consolidation ahead of the next leg higher.
This is a packed week for data though with the construction and services PMI still lying ahead while on Thursday the Bank of England decision will be key.
There is thus more than enough on the fundamental docket to keep the sterling to euro exchange rate lively.
Strong Month for UK Manufacturing
The start of the final quarter saw the UK manufacturing sector record its best month of output growth since June 2014, stepping out of the subdued trend experienced through much of the year-to-date.
It is interesting to note that exports may have benefited from the decline in the value of the sterling exchange rate complex seen since July.
David Noble, Group Chief Executive Officer at the Chartered Institute of Procurement & Supply notes:
"The sector rode on the crest of an exports market wave taking full advantage of the opportunity to create a surge of output growth and new orders.
"Though domestically orders were still strong, it was export orders primarily from the Middle East, East Asia and the USA, that supported this expansion of work. Larger corporates were the overall winners more able to meet the demands of the overseas markets and employing more staff, as SMEs lagged behind with little change."
Will the return of the British pound to its best inter-year levels against the euro hit exports once more and subdue growth in UK manufacturing?
This could well be the case but we don’t see it as reason enough for the Bank of England to delay that pro-GBP interest rate rise any longer.
